Obama proposes new action on oil speculation

Utilizing the bully pulpit in an attempt to push down stubbornly high oil prices, President Barack Obama on Tuesday announced five steps to strengthen oversight of the financial markets where contracts for future delivery of crude are traded and proposed increased funding for regulators to monitor these markets.

Gas prices are shown at a BP station in Chicago, Illinois on March 26, 2012.
Chicago Tribune/MCT

Utilizing the bully pulpit in an attempt to push down stubbornly high oil prices, President Barack Obama on Tuesday announced five steps to strengthen oversight of the financial markets where contracts for future delivery of crude are traded and proposed increased funding for regulators to monitor these markets.

The president made remarks in the White House Rose Garden, flanked by Treasury Secretary Timothy Geithner, Attorney General Eric Holder and the heads of agencies that monitor oil trading and combat price-gouging of consumers. Obama suggested that financial speculators were running up the price of oil at the expense of American motorists.

"We can’t afford a situation where speculators artificially manipulate markets by buying up oil, creating the perception of a shortage and driving prices higher, only to flip the oil for a quick profit," Obama said. "We can’t afford a situation where some speculators can reap millions, while millions of American families get the short end of the stick."

Calling for "more cops on the beat to monitor activity in energy markets," Obama also proposed an increase in civil and criminal penalties for illegal energy market manipulation and other activities. As a means of discouraging speculation, he proposed having Congress require that Wall Street traders put more money aside to pay off the bets made on oil contracts. And he called for toughening financial penalties tenfold and imposing penalties for every day a violation occurs.

The high oil prices _ above $104 a barrel on the New York Mercantile exchange at Tuesday’s close _ are politically damaging to the president’s re-election chances. Gasoline prices on Tuesday averaged $3.904 nationwide for a gallon of unleaded gasoline _ within 21 cents of the all-time high set in 2008.

While pump prices make up a small percentage of the spending of most American families, they carry heavy psychological weight on consumer sentiment. Motorists have few alternatives to gasoline and visit the filling station weekly.

In a briefing for reporters ahead of the president’s Rose Garden statement, a senior White House official refused to say whether the new effort would have any effect on oil prices. In fact, if everything the president proposed was enacted by Congress, it isn’t clear it would necessarily make a difference in price. That’s because the president’s plan seeks to attack illegal manipulation of prices, while experts think much of today’s high prices has to do with excessive but legal financial speculation.

“We welcome additional funding for the (Commodity Futures Trading Commission) and more cops on the beat,” Dennis Kellher, president of the advocacy group Better Markets, said in a statement. “But the problem with rising oil and gas prices is excess speculation. Claiming to ‘crack down’ on manipulation and ‘single traders’ will do nothing to stop Wall Street speculators from running amok in the commodity markets. Wall Street pours hundreds of billions of dollars into the commodity markets every month to speculate, and that is causing prices to jump.”

Obama acknowledged that the "none of the steps by themselves will bring gas prices down overnight." But, he said, "it will prevent market manipulation and make sure we’re looking out for American consumers."

Opponents of the president weren’t inclined toward new curbs on Wall Street, and Republicans accused him of grandstanding.

“If I were to guess, I’d say today’s proposal by the president probably polls pretty well. But I guarantee you it won’t do a thing to lower the price of gas at the pump,” Senate Minority Leader Mitch McConnell, R-Ky., said in a scathing statement. “It never has in the past. White House officials admit as much. Why it would it now?”

McClatchy documented in a series of reports last year how the futures markets _ where contracts for future delivery of commodities ranging from oil to coffee to cotton are traded _ have been overrun by financial speculators. Historically, end users of these products, who are hedging against price shifts, made up 70 percent of trading activity in these commodities. Speculators traditionally played an important but secondary role in what economists call “price discovery,” the market finding the rational price for a product based on supply-and-demand fundamentals.

In recent years, the ratio flipped, with oil speculators who have no intent of taking delivery of oil now making up 70 percent or more of trading activity. Critics such as Michael Greenberger, the former head of the trading division of the Commodity Futures Trading Commission _ which regulates the futures markets_ contend that this flood of financial-sector speculation has pushed up the price of oil and is divorced from underlying market fundamentals of supply and demand.

“People, including the administration and others, are coming to realize that money moves these markets, and money sloshing around in the crude oil market, or any other market, is going to move the price,” said Michael Masters, a hedge fund manager whose repeated testimony before Congress highlighted the “financialization” of oil markets.

Researchers at the Federal Reserve Bank of St. Louis determined in a March 13 report that speculation was the second-largest contributor to rising oil prices, accounting for about 15 percent of the rise. Former Fed Chairman Alan Greenspan has said speculation is driving up oil prices, and Saudi Oil Minister Ali al-Naimi last month complained that current oil prices are “unjustifiable” given that there are not global supply shortages, a view he repeated last week.

Fears that tensions with Iran over its nuclear ambitions might lead to a conflict that disrupts oil supplies is the most often stated explanation on Wall Street for rising oil prices. But the Paris-based International Energy Agency said Thursday that world oil demand is sluggish and oil supplies are more than ample to offset a loss of Iran’s oil exports of 1 million barrels per day. The IEA said global oil inventories rose by 1.2 million barrels per day over the first three months of 2012. Additionally, China’s torrid pace of growth has slowed sharply, parts of Europe are in recession, and U.S. demand for oil and gasoline remains weak. There is little in the fundamentals to justify today’s high prices.

Advocacy groups such as Better Markets argue that what’s needed is to limit how much speculation can take place. The landmark revamp of financial regulation in 2010, shorthanded as the Dodd-Frank Act _ empowered regulators to impose speculative limits called position limits on individual traders and companies, not just on Wall Street but across global trading platforms.

But Big Finance, which is earning huge sums in the trading of contracts for oil and other commodities, has fought back, suing the Commodity Futures Trading Commission in federal court in a bid to thwart the imposition of any speculative limits.

In an unusual move, 19 U.S. senators late last week filed a friend of the court brief in support of the CFTC, pushing back on the suit filed by the International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association. The senators _ 18 Democrats and one independent _ all sit on committees with jurisdiction over oil trading, finance and Wall Street. They said in their brief that they intended to assist the court in understanding what the legislative intent was on speculative position limits called for in the revamp of financial regulation.

“After seven years of Congressional studies finding excessive speculation and price manipulation in the commodities markets due in part to regulatory loopholes and CFTC waivers of position limits, Dodd-Frank was designed and intended to make those position limits mandatory,” the senators said in their brief. The waivers they referred to were granted to Wall Street banks such as Morgan Stanley and Goldman Sachs, treating them as if they were an airline or some other large user of oil.